There’s a major crisis brewing in Iraq. Sectarian violence has risen to levels not seen in decades.
In short, the Sunni militant group, ISIS, has begun a large-scale military insurgency, and is aiming to take over the country.
The Shiites, who occupy positions of power (including the presidency), are on their heels.
Now, as soon as the threat of violence became imminent, Wall Street Daily readers were writing in – asking about how the events in Iraq would ultimately affect oil prices.
You might be surprised by my answer…
Oil’s Bounce Will Be Short-Lived
It’s understandable that some investors believe the conflict in Iraq will send oil prices skyrocketing.
But, so far, oil prices haven’t risen as much as you’d think.
The reason is simple…
The United States, while strategically interested in Iraq’s future, is the beneficiary of a massive oil boom at home. This lessens the need for Iraqi oil, which has only begun to enter the market in earnest over the past couple of years.
Plus, Iraq only produces about 3.2 million barrels per day. That’s just not enough to affect global oil supplies in the longer term.
Another factor to consider is that the Iranians likely wouldn’t cross into Iraqi space without the blessing of the United States on some level. And any aid Iran is providing in the crisis could lead to sanctions on the Iranian oil industry being lifted.
In that case, any Iraqi oil that may be taken off the market could be easily replaced anyway.
Indeed, with U.S. oil production slated to grow and Saudi capacity still available, supplies haven’t really been affected.
I don’t expect this to change much, either.
History has shown that oil price spikes are usually short lived – and any bump the resource receives because of the situation in Iraq will be no different. Supply is ample, and that’s always what dictates the price of oil in the end.
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Heck, oil prices actually dipped yesterday once the United States said that it would be sending a small military force into Iraq to help sooth tensions.
For those of you who still want to take the risk, however, you could try day trading the United States Oil ETF (USO), which mimics most of the move in the price of the underlying commodity.
And “the chase” continues,
Keeping Tabs on the Situation in Iraq
If you’re unfamiliar with exactly what’s happening in Iraq, here’s a brief rundown…
There are four factions at play here: the Sunnis, the Shiites, the Kurds and the Iranians.
The Iranians have sent in military forces to bolster the Shiites, as they share a similar faith – despite non-similar ethnicities and cultures (the Iraqis are Arabs).
The Kurds are trying to protect their interests, especially their oil fields in Northern Iraq – around Erbil.
The Sunnis are a minority in the country, making up around 35% of the population – but they used to be in control of the military under Saddam and also made up the majority of the army. While they may not be a match for the American or Allied forces, they can defeat the Shiite forces, which are relatively new to the business of war. They also have the backing of other Sunnis in the region and likely mercenaries with al-Qaeda roots.